Seattle Defends Income Tax in Court, Judge Expected to Rule Next Week

The City of Seattle appeared in court Friday for the first arguments in what promises to be a long legal fight over its recently passed high earners income tax.

If it can hold up in court, the tax will charge .25 percent on income above $250,000 ($500,000 for joint filers). The city would use the money to fund social services, reduce regressive taxes, or replace lost federal funding.

In a state with the most regressive tax system in the country and a city that is particularly generous to the wealthy, passing the tax was a popular move for Seattle's left. But the tax will faces court challenges, which will likely reach the state supreme court. Friday's hearing was the first battle.

Over the course of three hours, attorneys for several plaintiffs, including investment manager Michael Kunath, argued the tax violates state law and court precedent.

In defending the tax, lawyers for the city and the Economic Opportunity Institute argued Seattle is too dependent on regressive taxes that unfairly hit poor people. (The EOI helped craft the tax.)

“Poor and middle class people are being pushed out" while the city raises revenue with regressive taxes, Knoll Lowney, representing the Economic Opportunity Institute, said in court Friday. "This threatens to make Seattle a home only for the rich." (Notably, an attorney on the other side pointed to Seattle's soda tax, passed just “two weeks before regressivity became an important reason for passing the income tax.")

Attorneys defending the tax also made unusual arguments in hopes of bypassing unfavorable law and precedent. Along with a 1930s Supreme Court ruling against a state income tax, Washington State Law says "a county, city, or city-county shall not levy a tax on net income." Lawyers defending the tax argued Friday against interpreting state law as a blanket ban on any city income taxes like the one passed by the city council.

They argued Seattle's income tax is not on "net income" because the ordinance mandates a tax on "total income in the tax year in excess of $250,000." The ordinance defines "total income" as the "amount reported as income before any adjustments, deductions, or credits." In a motion to the court, the city wrote: “Simply put, total personal income is not net income.”

But lawyers for the plaintiffs claim there is no meaningful distinction. The tax affects net income, they argue, and is therefore illegal.

“There is no merit to any of the arguments they’re making," said attorney Matthew Davis. "There is a statute that says, 'thou shalt not do this' and the city council said 'we’re going to do it anyway.'"

Davis twice called the arguments from the city and EOI "the biggest bunch of legal malarky that I’ve ever heard."

Paul Lawrence, representing the city, argued the state supreme court had in the past wrongly applied previous case law to block income taxes. Lawrence and Lowney also argued the income tax is in fact a version of an excise tax, which is allowed by state law, because it is a tax "for the privilege, for the benefit of living in Seattle."

“People in Seattle are obtaining significant benefits from residing here," Lawrence said. "That is what the city is trying to tax."

Speaking to reporters after the hearing, Christopher Rufo, a plaintiff who would not actually pay the tax, responded to that argument. "As a Seattleite and as an American, I think it's a right to choose where we live and where we do business," Rufo said.

King County Superior Court Judge John Ruhl asked few questions Friday and gave little indication as to which way he was leaning.

“This is a very, very important issue and it deserves a lot of attention,” Ruhl said. “Obviously, it’s going to get lots of attention in the coming months from another court. I want to give it the attention it deserves at this level as well.”

He said he plans to rule by Thanksgiving.

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